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Small Business and the Corporate Tax Cuts

With President Trump’s new Tax Cuts and Jobs Act relatively hot off the press, many individual and family taxpayers are all eager to see how much they’ll get to keep – both this fiscal year and in April 2019, when the bulk of the tax plan comes into effect.

The tax reform touts many notable features. A few: it changes income tax brackets, both in where they cut off and in each bracket’s percentage; it nearly doubles the standard deduction from what is used to be, for individual and joint filers alike; it caps the State and Local Tax Deduction (SALT) break at $10,000; it eliminates the federal fine levied on people who did not obtain health insurance, known as Obamacare’s Individual Mandate; and it adjusts the child tax credit, doubling it to $2,000 per child and raising the income threshold under which the credit can be applied.

Certain elements of the tax bill, however, seem to be soaking up the spotlight: namely, the ones surrounding corporations.

Plenty of people, despite the many individual provisions included in the bill, see the Tax Cuts and Jobs act primarily as a corporate tax overhaul – and honestly, for good reason. For one, it reduces the corporate tax rate from 35% to 21% – only one percent higher than was originally promised by President Trump, and finally within the ballpark of the rest of the world’s nations. (Some corporate tax rates around the world: Canada, 15%; China, 25%; Finland, 20%; Japan, just over 23%; Germany, 15%.)

Additionally, it puts into place a 20% deduction of income for pass-through corporations – LLCs, S-Corps, Partnerships, and Sole Proprietorships. These firms are not taxed at the corporate tax rate; rather, they are taxed at the personal income tax rates of every owner or shareholder.

Long story short, corporations are getting to keep a hell of a lot more of their money.

Now, I know the word “corporation” is being tossed around a lot here, and I don’t mean to trigger anyone. I know it’s a mean word, and it screams rich white guys in suits firmly maintaining the societal patriarchy, but please put down your pitchforks and hold off on occupying a certain street in NYC for just a second. Let’s look at the facts about “corporations,” and then maybe we’ll see that the tremendous lift that they are getting from the tax bill isn’t all that bad.

First off, I’m sure corporations’ getting a tax cut simply means a bunch of rich, white guy CEO’s lining their pockets with even more millions, right? Wrong. Newsflash: almost all businesses are pass-through – around 95% to be exact. These firms don’t enjoy the corporate tax cut the tax bill offers – rather, they enjoy the 20% deduction, as well as the lowered income tax rates that together (taking all the owners into account) act as the effective tax rate for the firm.

But hey, there are lots of big businesses that are pass-through, right? Trump’s real-estate business is an LLC, after all, and he’s one of those abhorrent white males! Again, wrong. Newsflash #2: the vast majority of businesses, C-corporation or not, are small. Defining a small business in the typical way – any business with no more than $10 million in annual receipts (basically sales) – we see that upwards of 96% of all pass-through firms are small businesses, and even 95% of C-corporations are also small businesses. Ergo, whether you look at the corporate tax cut, or the 20% write-off coupled with lower income tax rates, greater than 95% of beneficiaries are small businesses. The C-corporations, 95 out of every 100 being small business, enjoy the corporate tax cut, while the pass-through organizations, an even greater share of which are small, enjoy the write-off and the lower income tax rates.

These facts bring us to the third point. Both sides of the aisle tend to agree that small business makes up the backbone of our nation’s economy; it certainly makes up the majority of its businesses. As a result, both sides of the aisle are always looking to help out small businesses. And if the previous paragraph was a bit much in the way of figures, let me summarize it in one line: by helping all businesses and corporations, you are inherently primarily helping small business. The reverse of this statement is equally enlightening: The best way to help small business is to help all business.

Now, don’t get me wrong: there is absolutely nothing bad about helping big business or “corporate America.” In fact, there is a lot right with it: these large organizations employ millions of people domestically and worldwide and account for around 81% of the U.S.’s profits, and virtually all profits among C-corporations. Nevertheless, in addition to the (inevitable) fact that massive firms are crucial in driving the economy (yes, I’m sorry to say, “big business” and “corporate America” succeeding is integral to our entire nation succeeding), don’t lose sight of the fact that for every four or five of these big firms benefiting from tax breaks, so are 95+ small firms.

In a nutshell: Big businesses, though the overwhelming minority of businesses in the U.S., account for much of its profits. This will never change, nor should it. This fact, however, has nothing to do with helping small businesses since, after all, we don’t have a zero-sum economy, and the success of big businesses doesn’t mean the failure of small ones. (A rising tide, remember?) We don’t have the same size economy now as we did 100 years ago, and an economy grows together. Large firms doing well means America doing well, which means American business doing well, 95% of which is made up by small businesses. The way to help small business is to help all business, since small businesses makes up so much of all businesses in the U.S., corporations or not. So, by making life tremendously easier for “corporations,” the tax bill inherently makes life better almost entirely for small businesses – not the dreaded white, successful males that libs seem to hate so much.